PBGC Single-Employer Premiums and Their Impact on Plan Sponsorship

Except for the smallest plans I actively discourage potential clients from establishing defined benefit plans that would have to be covered by the Pension Benefit Guaranty Corporation (PBGC) primarily due to onerous premiums. The American Academy of Actuaries recognizes the problem and put out an issue brief, excerpted below.

During the past several decades, many private-sector employers have discontinued their defined benefit plans for a variety of reasons. The financial burden of the annual premiums paid by employers participating in the PBGC program has been identified as one of the reasons. Employers that believe that their plans will never require financial assistance from the PBGC consider premiums wasted money, and many employers have taken plan downsizing steps to reduce them. Decisions made by employers to discontinue a plan, reduce the size of their plan, or decide not to adopt a plan due to the large premiums can be attributed in part to lawmakers’ failure to recognize the PBGC’s mission, which was written into the law creating the PBGC (The Employee Retirement Income Security Act of 1974 [ERISA] §4002). Consequently, changes to the premium structure are advisable. (page 2)

2. Why have premiums increased so rapidly? There have been several fairly recent laws enacted by the Congress in which PBGC premium increases have offset the cost of legislation unrelated to PBGC. An increase in PBGC premiums is categorized as an increase in general revenue and can be used to offset the cost associated with other governmental expenditures in order to achieve budget neutrality. Thus, even if an increase in premiums is not requested by the PBGC to sustain the system, and even though the assets of PBGC programs are available only to pay the obligations of PBGC, legislative scoring rules permit PBGC premium income to be treated as if it were available to pay for other costs in a legislative measure. Having said that, while these significant increases in premium levels were not requested by PBGC, they have improved the financial condition of the PBGC’s single-employer program. (page 3)

6. Is there evidence that the premium structure is becoming a deterrent to maintaining plans? In a 2018 Mercer Pension De-Risking Study on PBGC’s website here, a plan sponsor focus group explored reasons employers are looking to reduce plan risk. Plan sponsors commonly reduce risk by paying lumps sums to participants and purchasing annuities for some of the plan’s liabilities. The most extreme action to reduce risk is a plan termination. Among the major reasons cited for de-risking is the increasing burden of PBGC premiums. According to a MetLife survey, 52% of surveyed plan sponsors said PBGC premiums were a factor in their de-risking decisions. (page 4)

13. Should the budget scoring rules that allow the counting of PBGC premium increases toward the scoring of unrelated legislation be changed? In 2017, the Academy’s Pension Practice Council wrote a letter in support of changing the budget scoring rules. The letter argues that recent premium changes passed by Congress could be construed as being made solely to provide support for unrelated items included in the legislation. The letter points out that premium revenue cannot, in fact, be diverted to these other purposes and therefore the beneficial effect on the budget is illusory. (page 8)

22. Are there defined benefit pension guaranty programs in other countries? Yes, there are pension guaranty programs in the U.K., Germany, Switzerland, Sweden, Finland, and the province of Ontario in Canada. The largest of these programs is in the U.K. In 2004, the U.K. instituted a defined benefit plan insurance program called the Pension Protection Fund (PPF), which relies heavily on risk-based premiums. A description of the PPF levy components can be found on page 65 here. Its risk-based premium is based on the plan’s underfunding, risk-adjusted asset values, and the risk of plan sponsor bankruptcy, as determined by a commercial credit rating agency contracted by the PPF; a plan’s bankruptcy risk is confidential information and is available only to the PPF, the plan trustees, and the plan sponsor. Sweden and Finland also have risk-based premium structures. (page 11)

20 responses to this post.

  1. Posted by Rex the Wonder Dog! 🐶🐶🐶🦴🦴🦴 on October 10, 2020 at 3:17 pm

    PUBLIC plans should be mandated to pay a self-insurance type premium into a special account, rainy-day plan, just like the PBGC mandates private sector employers to pay into the PBGC. That would diminish, if not stop 🛑 the unlimited jacking of retro active pension increases and risk.


    • Posted by Tough Love on October 10, 2020 at 3:55 pm

      Think about it ……….. the premium would simply become ANOTHER element for the Taxpayers to pay. It’s not the answer.

      ALL Public Sector plans need to end …. ZERO future service accruals. Replace it for future service with a 401K-style DC Plan comparable in generosity to that granted Private Sector workers by their employers.


      • With the exception of those already eligible to retire RIGHT bestie?
        Ya know, to keep a guy like me from retiring now and collecting that pension instead of NOT collecting and contributing for 4 years and 8 months. And heaven forbid, to delay collecting and those free health bennies.
        I know you don’t hold el Gaupo to your pension rule right? My dear dear friend. 😉


      • Posted by NJ2AZ on October 11, 2020 at 12:30 am

        plus you know they’d just sweep the money into the general fund anyways


  2. Posted by Tough Love on October 10, 2020 at 3:59 pm

    Just watched the (2013) movie “White House Down”.

    While clearly not to the extremes shown in this action thriller, it made me think about the scary possibilities that may arise as a result of Trump’s refusal to accept defeat and causing chaos by claiming that the election was “rigged”.


  3. Posted by Tough Love on October 10, 2020 at 4:49 pm

    I been reading a great deal about the most recent Stimulus proposals, and one thing keeps coming to mind given the enormous magnitude involved (about $2 Trillion) ….

    Would our Elected Officials be as willing to spend such amounts if INSTEAD of just creating additional Federal debt (printing money or the Fed making a bookkeeping entry), they actually had in hand $2 Trillion in Stock in America’s most successful corporations and had to sell those REAL assets ?


    • Posted by NJ2AZ on October 11, 2020 at 12:31 am

      i’d bet dollars to donuts the minute those $2T (in book value) of assets (whatever they might be) went on the market we’d all find out they aren’t worth $2T


  4. Posted by Tough Love on October 10, 2020 at 7:26 pm

    Question ……………. What’s the WORST job in the world starting 1/20/2021?

    Answer ……… OMG, being a Secret Service agent assigned to protect Donald Trump after he losses the election.


    • Hmmm….would you rather be a porta john cleaner than work directly with trump in any capacity? For TL, I think she’d pick the former. Lol. Many would.


      • Posted by Tough Love on October 10, 2020 at 9:59 pm

        Trump is going to be one miserable/angry SOB after losing.

        Better to guard the Carters. Sure would be boring, but certainly much less miserable.


        • Yes. For sure. I think he is entitled to 10 years of Secret Service protection (if he makes it that long) as opposed to lifetime protection (bush 43 or Clinton I beleive was the last).
          I’d say Trump Tower would be a cool gig, but not in NYC. Tragically few things are cool there now.


          • Posted by Tough Love on October 11, 2020 at 10:30 am

            The law was changed ….. it went back to lifetime via the Former Presidents Protection Act of 2012.

          • Figures. Although with Trump he WILL need it for life.

          • Posted by Tough Love on October 11, 2020 at 10:22 pm

            Like he can’t afford to pay for his own security.

            It really bugs me that America’s Taxpayers had to pay to protect his adult children as they traveled the globe on personal BUSINESS ventures.

          • Posted by Rex the Wonder Dog! 🐶🐶🐶🦴🦴🦴 on October 12, 2020 at 11:27 am

            Like he can’t afford to pay for his own security.

            It really bugs me that America’s Taxpayers had to pay to protect his adult children as they traveled the globe on personal BUSINESS ventures.
            Hell YES Hunter Biden should have paid his own damn security, that dirtbag should be in JAIL, along with his father and Crooked Billary.

          • Posted by Tough Love on October 12, 2020 at 12:55 pm

            Rex, Clearly, you need that rabies booster shot.

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